• Introduction
• Pre-Securities Act Common Law Enforcement
• The Securities Exchange Act of 1934 - Principles of Full Disclosure
• Foundations of Fairness: The SEC Develops Theories and Rules on Corporate Disclosure
• The SEC Takes Command
• Counterattack From the Supreme Court
• Raising the Stakes
  • Corporate Take-Overs and Insider Trading Scandals in the 1980s
  • Congressional Deference to SEC Enforcement
• Power of SEC Resilience
• Old Debate and New Rules: SEC Regulation of Insider Trading in the Global Marketplace

Fair To All People: The SEC and the Regulation of Insider Trading

Raising the Stakes

Congressional Deference to SEC Enforcement

After the passage of ITSA and in the midst of the insider trading scandals of the mid-1980s, SEC Chairman Shad was again called to testify before Congress on a proposal to strengthen the power of SEC insider trading enforcement. Shad downplayed the effusive praise he received for his aggressive fight against insider traders. Seeking to minimize any political overreaction to the problem, Shad cautioned that insider trading "should not be exaggerated out of proportion. All fraudulent activities, including insider trading," he contended, "amount to a fraction of one percent of the multibillion dollars of corporate and Government securities trade daily in American" and insider trading is "but one component of the Commission's enforcement program."(50) Shad feared that Congress, in an attempt to demonstrate its resolve about insider trading, might enact strict legal definitions that would result in new and innovative legal loopholes around the law, making the SEC's enforcement effort more difficult.

Chairman David S. Ruder, with Justice Antonin Scalia, at his swearing-in ceremony, 1987

Just three days after the inconclusive Carpenter decision, the SEC and prominent securities lawyers, instead of relying on the expertise of Congress, submitted their own proposal to formally define insider trading. The definition, supported by new SEC Chairman David S. Ruder, closely mirrored the misappropriation theory that the SEC had unsuccessfully espoused in Chiarella, Dirks and Carpenter.(51) In a sense, by calling for a definition, the SEC was admitting that its strategy of using the courts to regulate insider trading had stalled.

Seizing the moment, the SEC took this opportunity to legislatively overturn those cases where Justice Powell had rebuked the agency by promoting the expansive misappropriation definition for insider trading enforcement. The hearings resulted in passage of the Insider Trading and Securities Fraud Enforcement Act (ITSFEA) in October 1988. ITSFEA extended insider trading penalty provisions, increased the maximum individual penalty to $1 million and a maximum jail term of ten years, and gave parties, who traded in a security contemporaneously with the inside trader, a private cause of action.(52) In addition, ITSFEA offered informants a bounty amounting to ten percent of civil penalties recovered from inside traders penalized on the basis of the informant's information. The SEC was empowered to establish rules in furtherance of that provision. But the broad definition of insider trading that the SEC and securities lawyers had proposed was excluded from the legislation.

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